Fees continued to decline in 2022, finds a new Morningstar study that analyzes costs of U.S. funds.
According to the research, the asset-weighted average expense ratio of U.S. funds fell from 0.40% in 2021 to 0.37% in 2022, for the second-largest year-over-year decline since 1994. The findings show that asset-weighted average fees continue to drop, at currently less than half of its previous 0.91% figure in 2002.
As a result, Morningstar estimates that investors saved nearly $9.8 billion in fund expenses last year.
Morningstar credits several factors for the sink in fees, including investors who now favor lower-cost funds, market competition among asset managers to cut fees, and a shift toward fee-based financial advisors with semibundled or unbundled share classes.
“We saw substantial assets wiped from expensive funds in 2022 as investors poured their money into lower-cost funds to minimize investment costs,” said Bryan Armour, Morningstar’s director of passive strategies research, in a statement. “Asset managers have responded to this trend by cutting fees to vie for market share, and the end result is a win for investors.”
Specifically, the asset-weighted average expense ratio for active funds fell to 0.59% in 2022 from 0.61% in 2021, driven mainly by large net outflows from expensive funds and share classes, Morningstar states in its report.
Asset-weighted average expense ratios for passive funds dropped 0.12% in 2022 from 0.13% a year earlier, and the equal-weighted average expense ratio—which indicates what funds charge regardless of where assets are held—fell to 0.95% in 2022 from 0.96% in 2021.
Active funds’ equal-weighted fees declined to 1.02% from 1.03%, while the equal-weighted average fee among passive funds dropped to 0.54% from 0.55%.
The Morningstar study also compares investor fees in sustainable funds versus conventional investments, finding that those who invest in the former are paying a “greenium” relative to investors in the latter.
Investors who allocated dollars to sustainable funds had a higher asset-weighted average expense ratio, at 0.50% at the end of 2022 versus 0.37% compared to traditional peers.
However, Morningstar’s report makes a note that sustainable fund fees have been falling on both an equal- and asset-weighted basis. “Over the past decade, the average fee charged by sustainable funds has fallen 35%, while the average fee paid by investors in these funds has dropped 48%,” wrote Morningstar. “This has been driven in large part by the introduction of a large number of low-fee sustainable index mutual funds and ETFs to the menu, many of which have gained favor with investors.”
Finally, among the largest asset managers, Vanguard still claims the lowest asset-weighted average expense ratio among asset managers, which was 0.08% in 2022 compared to 0.10% in 2017. Vanguard was followed by State Street Global Advisors (0.15%), iShares (0.17%), and Dimensional Fund Advisors (0.24%).
Additional findings from Morningstar’s 2022 U.S. Fund Fee Study can be found here.
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